Birla or Biyani, who is smarter?

Future’s sale of its best performing format to ABNL raises questions about the strategy of both players

Kishore Biyani sold his cash cow, Pantaloon, in an attempt to relieve his company of the debt burden it is creaking under. The ₹5,000 crore debt has brought a lot of bad press but the sale to Aditya Birla Nuvo (ABNL), Future will hope, will help lessen the red. As per the deal, Pantaloon Retail will issue debentures worth ₹800 crore to ABNL, after which Pantaloon’s apparel retail format will be de-merged into a separate company with debentures of ₹800 crore and debt of ₹800 crore thrown into it. Once the demerger process is completed, ABNL will make an open offer to raise its stake in the new entity to 50.1%, while Biyani would continue to have a 25% stake. 

Biyani has been trying to get rid of several non-core businesses such as Future Capital Holdings and the loss-making, E-Zone, but has failed in all attempts. The company was rumoured to be entertaining a bid from the Hyderabad-based media company — Deccan Chronicle — to offload Future Capital but the sale failed to materialise. “Biyani realised that he didn’t have a choice, as his non-performing formats like E-Zone have no value. Selling Pantaloon was the only option,” says Harminder Sahni, MD, Wazir & Co, a retail consultancy.  

Ankur Bisen, associate director, Technopak advisors, disagrees, “It’s a brave move. Fifteen years ago, Future Group was Pantaloon and Pantaloon was Future Group.” But now, the group has evolved from an apparel to a retail company, which means that apparel may not be that important anymore, says Bisen. 

Biyani has said that the Pantaloon deal is just the first of his divesting activities and that many more deals will follow. Also, in an earlier interview with Outlook Business, Biyani had expressed his intention to focus on foods. “E-zone is a promising business, I don’t think he will hive that off, neither will he get rid of anything that is to do with food or FMCG,” Bisen of Technopak opines. That the company has been trying to sell its non-performing businesses for more than a year but not found a buyer means that Biyani will either have to turnaround these companies or reconcile to the sunk cost. 

Distress buy?

Ironically, what is being described as a distress sale for Biyani does not seem so at closer inspection. At a time when the retail business is going through a rough patch with companies, including that of Birla’s, struggling to get their act together, Birla has paid a premium — a price equal to topline. Pantaloon has retail space of 2.2 million sq ft, across 65 stores in 35 cities. The apparel retailer is expected to clock a turnover of ₹1,700 crore in June 2012.

“They could have certainly got a better deal if they waited, but Birlas are famous for making expensive buys,” remarks the CEO of a leading consultancy firm. The Aditya Birla Group, has the reputation of overpaying for retail businesses. The group paid roughly ₹300 crore in 2005 to acquire the food retail business Trinetra, now rebranded as More.

“We had done due diligence on behalf of Godrej, and had valued it as an ₹80 crore business. Adi Godrej had said it was too expensive,” says the spokesperson of a consultancy firm. Today, More has more than 600 stores, and is yet to be profitable. Similarly, the company is known to have paid ₹550 crore for Madura Garments when its turnover was around ₹270 crore in early 2000. Though the ₹1,809 crore Madura Garments’ financials look healthy (the company made a PBIT of ₹66 crore in FY11), the company has incurred losses in brands such as Collectives and SF Jeans.

The deal on the face of it looks over-priced, agrees Abhishek Ranganathan, research analyst, MF Global Securities. “Much depends on the kind of stake the Birlas would get post the open offer.” 

What will also make the acquisition tricky for Birlas is despite its relatively high margins, Pantaloon has had to deal with challenges like high per sq ft inventory costs, which have resulted in lower sales. Against an industry inventory turnaround of less than 40 days, Pantaloon’s inventory turnaround time is over 100 days. 

As a matter of fact, the consolidated revenue of Pantaloon Retail (includes Pantaloon, Central, Home Town, Brand Factory and E-Zone) in FY11 was ₹4,114.68 crore as against ₹6,019 crore in FY10.   

On the flip side, the deal will give the Birlas access to wider retail presence including women’s wear.  It would also help spruce up their value offerings. According to Wazir’s Sahni, this deal will give Aditya Birla Nuvo, the potential to become a ₹20,000 crore-business. 

Surely, the potential exists. Reams have been written on the retail potential in the country. Unfortunately, few companies, including the financially mighty, have demonstrated that they can exploit the potential profitably. Good luck
to ABNL.